U.S. Investments in Car Companies Won't Pay Off

The capital put into Chrysler using TARP funds produced a loss of $1.6 billion on a $4 billion loan, according to data released by the U.S. Treasury Department. It said: "The loan was originally made on January 2, 2009 to Chrysler Holding, the parent company of Old Chrysler, in the amount of $4 billion.The loan went into default when Old Chrysler filed for bankruptcy in April 2009." Chrysler has paid back $1.9 million of that loan.

The news came after General Motors announced a first-quarter profit of $865 million, a turnaround that seems impressive. But the Chrysler investment losses by the government may still be small compared to the eventual recovery from GM. The larger company has paid back $5.8 billion in debt due to Treasury, But the total taxpayer investment in GM is $50 billion, which was exchanged for a 60.9% interest in it.

The government is still unlikely to get back most of its investment in the two car companies. Treasury holds only 10% of Chrysler, so to recoup that the value of a buyout or IPO would have to be huge. Chrysler posted a $143 million profit for the first quarter of 2010. The Treasury will not try to increase its stake in Chrysler to offset the lost money.
GM says it plans an IPO later this year, which the car company says could bring in as much as $50 billion. But GM's financial performance makes that unlikely. GM said it was not likely to do as well for the balance of the year as it did in the first quarter. That means its profits will be under $3 billion. Ford (F) made $2.1 billion in the first quarter and said it expected that number to improve throughout the year. Ford does have $34 billion in debt, but it also has over $23 billion in cash. GM was able to eliminate most of its debt through its bankruptcy. Ford's market cap is $40 billion, and it is clearly much more profitable than GM.

The idea that GM will have an IPO large enough to pay back taxpayers is very unlikely given its current earnings. The government has already taken a loss on its Chrysler debt. The TARP funds may have kept Chrysler and GM afloat, but that was in exchange for what's likely to be two very bad investments.